Monday 19 October 1987 is known as “Black Monday” – the biggest single-day drop in stock market history.
The Dow Jones dropped 22.6% in a single day, according to Investopedia, and this was partly due to the recent introduction of automated trading. The computers tended to produce more sell orders when prices were falling. So, a small dip soon snowballed, and as other investors saw the value of their shares dropping, they panicked.
In an attempt to minimise their losses, many people abandoned ship and sold off their investments. But this decision may have cost them in the long run.
As automated trading was one of the primary causes of the dip, the markets quickly recovered and began growing again.
Those who held their nerve and didn’t sell investments soon started to see positive returns as, according to the Motley Fool, the Dow Jones rebounded in November 1987 and had recouped all of the losses made on Black Monday by September 1989.
As a result, those who reacted quickly and sold may have missed out on positive future returns once the market corrected itself.
The events of Black Monday illustrate the importance of being able to remain calm when the value of investments drops in the short term. Unfortunately, your clients may struggle with this as it can be difficult to do nothing and trust that their investments will eventually increase in value again.
The good news is, there are several ways that a financial planner can help your clients keep their cool in a volatile market, so they don’t make any poor decisions. Read about five here.
1. Providing an impartial sounding board
Your clients’ investments often represent their financial security in the future. When they see the value dropping, they may be concerned that they won’t be able to fund their retirement, or they will not have enough to leave to their family when they are gone.
There is a lot of emotion tied up in those investments, and that can be a disadvantage when your clients are making decisions. That’s why a financial planner can be so helpful in times of turmoil.
They are removed from the situation, so they can be an impartial sounding board who reassures your client.
In many cases, they give your clients the confidence they need to trust in their financial plan and refrain from making unnecessary changes.
2. Understanding the root of the panic
A financial planner will often work with your clients to understand why they are so concerned about market volatility in the first place.
Are they worried that it could affect their retirement income, or perhaps they are concerned that they won’t be able to leave as much to their family, for example?
In this case, their planner can find ways to shore up their financial plan in these areas by helping them increase pension contributions or focus on tax planning.
Meanwhile, if they are concerned about meeting short-term financial obligations, their planner can re-assess the balance between their cash savings and investments.
By understanding the root of their concerns, a planner can help your clients strengthen those areas of their plan and put their mind at ease.
3. Creating a goals-based financial plan
When the value of investments fluctuates a lot and your clients start worrying about their wealth, it is easy for them to forget about their wider goals.
The benefit of working with a financial planner is that they create clear short-, medium- and long-term goals with your clients. In many cases, investments may be part of their long-term plan.
A short period of market volatility should not affect those goals, so clients do not need to deviate from their investment strategy.
As such, being able to refer to their financial plan and see that they are still working towards their long-term goals can help clients put things in perspective and remain calm.
4. Doing due diligence on investments
Believing that they can accurately predict the performance of a specific investment is one of the biggest mistakes investors make. No amount of research allows you to see the future.
That said, it is still important to fully understand the investment and balance all the risks. Unfortunately, this can be challenging, particularly for those who don’t have that much experience with investing.
Additionally, in a volatile market when investors are rushing to move their wealth in an attempt to prevent losses, they may be even less likely to do adequate research first. Instead, they may follow the advice of others without question.
If clients do want to make changes to their investment strategy, a financial planner can help them do their due diligence. This ensures that they consider the risks properly, and that any changes to their investments align with their goals.
5. Preparing them for volatility in the future
Market volatility may be more likely to cause distress if your clients feel unprepared for it. The good news is, working with a financial planner gives them confidence that their financial plan is robust enough to weather the storm.
By building emergency savings, developing a clear investment strategy, and maximising pension savings, financial planners ensure that your clients are secure in the short term, and that they can generate enough income to fund their desired lifestyle in retirement.
This puts them in a strong position so market volatility may be less likely to derail their financial plan in the future.
Get in touch
If your clients are worried about how market volatility may affect their wealth now and, in the future, we can give them the reassurance they need.
Please contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top-Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
